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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Lifetime transfers: gifts with reservation (GWRs): settled property: settlement created when the settlor is domiciled outside the UK

Where the settlor was domiciled outside the UK at the time a settlement was made, any foreign property in the settlement is excluded property and is not brought into charge for Inheritance Tax (IHT) purposes (IHTM27220). This rule applies where property is subject to a reservation of benefit even though the settlor may have acquired a domicile of choice in the UK, or be deemed to be domiciled in the UK, at the time the gift with reservation (GWR) charge arises (IHTM04071).

Reservation ceasing on death

At the material date FA86/S102(3) deems the donor to be beneficially entitled to property that is, at that time, settled property. As the property in which the reservation subsisted is ‘property comprised in a settlement’, it is the provisions of IHTA84/S48(3) that are in point. It is the domicile of the settlor at the time the settlement was made that is relevant in deciding whether foreign property in which the reservation subsisted is excluded property.

Example

Henry, who is domiciled in New Zealand, puts foreign property into a discretionary trust under which he is a potential beneficiary (IHTM14393). He dies five years later having acquired a domicile of choice in the UK and without having released the reservation. The property is subject to a reservation on death but it remains excluded property and is outside the IHT charge.

Exceptions to the rule

There are, however, circumstances where this rule does not apply:

  • If the trustees had sold the foreign assets so that at the date of death the settled property was invested in UK assets, the exclusion would not apply as the property comprised in the settlement was not situated outside the UK, so IHTA84/S48(3) cannot apply
  • If the donor has acquired a domicile of choice (or is deemed domiciled) in the UK and adds other property to the settlement (irrespective of the situs (IHTM27071) of the property), we regard the donor as creating a separate settlement (IHTM04272). All the trust assets will be property subject to a reservation, but the foreign assets settled when the donor was domiciled outside the UK will be excluded property, whereas the assets settled when the donor was domiciled in the UK will be subject to IHT
  • And in the reverse situation, if a donor who is domiciled (or deemed domiciled) in the UK creates a settlement with foreign assets and the settled property remains subject to a reservation at death, the trust assets will be subject to IHT under FA86/S102(3) even if the settlor dies domiciled outside the UK as IHTA84/S48(3) does not apply - as well as being subject to relevant property trust charges (IHTM42000).

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Reservation ceasing during lifetime

Where the reservation is released during the donor’s lifetime, FA86/S102(4) treats the donor as making a disposition of the property by a disposition which is a potentially exempt transfer (PET) (IHTM04072). This is different to the basis of the charge arising on death, but as property in which the reservation ceases is ‘property comprised in a settlement’ the provisions of IHTA84/S48(3) are again in point to decide whether any foreign property is excluded property.

As FA86/S102(4) treats the donor as making a disposition, it is the treatment of excluded property when a disposition is made that is relevant. IHTA84/S3(2) states that no account shall be taken of the value of excluded property which ceases to form part of a person’s estate as a result of a disposition.

So as the donor is treated as making a disposition, property is treated as ceasing to form part of their estate. Provided that property is excluded property, IHTA84/S3(2) applies to exclude the assets in which the reservation ceased from charge.

The same exceptions to the above will apply as regards

  • foreign property which is replaced by UK situs property (IHTM27071)
  • property added to the settlement when the donor is domiciled in the UK, and
  • in the reverse situation outlined above, a charge will arise under FA86/S102(4) if the reservation ceases before the donor’s death.

Refer any case where you consider that there is such a charge, or any enquiries about the possibilities of a charge, to Technical.